Jeffrey Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp., says Houghton Mifflin Harcourt Co (HMHC) is expensive based on any metric. But, he thinks the company is well-positioned in the K-12 publishing sector.
“They are the largest publisher for the K-12 sector, and last year — for the first time in a while — you saw some decent growth in terms of states and local school districts increasing the amount that they were spending on K-12 publishing,” Silber says. “Not only did they have the money for the first time because tax receipts went up, but you also had a number of product lines where there were new adoption cycles in California and Texas and Florida and other states.”
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Those factors created what Silber calls “the perfect storm” for Houghton Mifflin, and the company had one of the best quarters in its history last fall. In addition, they recently acquired the ed tech business of Scholastic (SCHL).
“Obviously, like any market in the media sector, we’re seeing a move from print to digital, so they wanted to accelerate their own move there as well, and I think that acquisition pushes them in that direction,” Silber says.
Jeffrey Silber, Managing Director and Senior Analyst at BMO Capital Markets Corp., says some education companies are tying to expand beyond their core areas in an effort to deal with a challenging macro environment. He says DeVry Education Group Inc (DV) has been focusing on medical and health care.
“So they have a veterinary school and a couple of medical schools in the Caribbean; they have some nursing schools in the United States that for the most part have not been affected by all the [challenging macro environment],” Silber says. “So if you see other companies trying to reach out beyond their core business, I think that would be a good thing.”
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As bad as business has been for education companies, Silber says they are still able to generate good cash flow. As a result, he says the only reason they would need debt is to make an acquisition or to go private.
“But for the most part these companies still have decent balance sheets, and that’s why they’ve been able to survive what’s been going on in the past few years,” Silber says. “Hopefully that should continue.”
Joseph Janssen, a Director of Barrington Research Associates, says one of the stocks he is currently recommending is 2U Inc (TWOU). He says the company’s CEO has done a fantastic job.
“They are called the enablers in the space,” Janssen says. “They basically allow Ivy League tier-1 institutions to go online. They have clients such as USC, Georgetown, and they recently signed Yale.”
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Janssen says 2U brings those institutions into the online modality. They don’t have the same regulatory risk as other for-profit education companies, he says.
“They essentially work with the university, create the curriculum; they are the enrollment funnel for the university as well as the learning management system all the way through to graduation,” Janssen says. “The only things they don’t do, which is interesting, are they don’t control the admissions process and the actual professors themselves. It alleviates a lot of the regulatory headaches that some of the others have fallen into. “
Randy Churchey, CEO of Education Realty Trust, Inc. (EDR), says supply and demand dynamics are shifting in his company’s favor. He says demand is very constant, and he expects a 1.2% enrollment increase per year.
“A significant piece of that — and one that our investors know — is that we are a recession-resistant business,” Churchey says. “When a recession occurs and students don’t have jobs, enrollment actually goes up, which is obviously vastly different than the multifamily apartment or other sectors.”
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While demand remains constant, Churchey says that supply is dwindling. For 2015, new supply of student housing diminished 19% from the previous year.
“We haven’t announced that same number for 2016 versus 2015, but it is going to be a further decline in new supply,” he says. “So when you look at our business just from the fundamental real estate standpoint of demand and supply, it looks pretty good for the next few years.”
Mark Allin became the CEO of John Wiley & Sons Inc (JW.A) in June. He says he had worked closely with former CEO Steve Smith on the company’s divestment and acquisition program.
“We continue on that path and continue to be very ambitious for what we believe we can achieve in the markets in which we are operating,” Allin says. “I don’t see any immediate opportunities for divestment, but we remain very carefully focused on where our investment priorities are. The acquisitions we make are always carefully targeted to meet our strategic aims, and many of them are the result of close relationships that we’ve built up over time.”
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Allin says management is also continuing to look at the cost side of the business, particularly as the company experiences some revenue challenges in areas like books.
“We’re looking now to ensure that we have fully competitive cost benchmarks across the business, which create additional opportunities for margin expansion and free up opportunities for growth,” Allin says. “We are also making a major investment in an ERP deployment to ensure that we have the technology reporting and operational capabilities we need to succeed as a digital business.”
Brian Mueller, CEO of Grand Canyon Education Inc (LOPE), says the company is growing enrollment both online and on its ground campus. He says online enrollment is expected to grow 6 or 7 percentage points a year.
“We are today at just under 60,000 online students, and we will grow that to 80,000, 90,000 students over the next five or six years,” he says. “We’ve had a very steady rate of increase. Increasingly, the students that are attending online are graduate students — master’s and doctoral students primarily.”
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Mueller says growth on Grand Canyon’s ground campus is even more robust. Current enrollment is about 16,000, and he says it should hit 25,000 to 30,000 students in the next four to five years. Historically, a greater percentage of Grand Canyon’s revenue has been from online enrollment as compared to ground campus revenues, but Mueller says that gap is closing.
“Last time I spoke to you, about 10% of our revenues were from ground students and about 90% from online students,” he says. “Today, it’s 20% ground students and 80% online students.”
Lynne Thornton, Director at Aubrey Capital Management Limited, says Ctrip.com International, Ltd. (ADR) is an online travel company in China that is ready to benefit from changes in travel in the country.
“The penetration rate for online travel in China is currently quite low; 90% of Chinese have never traveled outside their own province. As people get richer we expect this to change,” Thornton says.
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Thornton says Ctrip fits well into the behavioral change phase of her firm’s wealth cycle model, in that as people get richer, they aspire for more consumer goods and experiences.
“Travel in China is growing at about 1.5 times GDP,” Thornton says. “We are looking for these companies that are riding a tailwind and enjoying an acceleration in growth. And we can look globally. We see Ctrip as one of those really strong opportunities.”
John Larkin, Analyst at Stifel, Nicolaus & Co., says Knight Transportation (KNX) is one of the transportation stocks he is currently recommending. He says the company is well-run and has always been thought of as a growth company.
“They sort of lost their way in terms of being able to provide growth during the recession years and the years immediately after, but really regained their momentum about a year and half ago and have continued that momentum,” Larkin says.
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Knight’s improved performance has been a function of some smart acquisitions, Larkin says. The company has redoubled its efforts focused on growing its brokerage business more quickly, and Larkin says those initiatives seem to be paying off.
“We would argue that Wall Street is sort of overlooking all of those favorable developments. The company also has made a transition at the CEO position,” Larkin says. “Kevin Knight, who is basically the Founder of the company, will retain his Chairman’s role, but has turned over the CEO responsibilities to his long-time right-hand man, Dave Jackson, who I think is terrific and is doing a great job running the business. He is growing the company in an industry where very few companies have been able to grow.”
Stifel, Nicolaus & Co. Analyst John Larkin says investors have been negative about railroads lately because of decreased grain and coal volumes. But, he sees opportunity in stocks like Union Pacific Corporation (UNP).
“That negative year-over-year volume comparison has really placed a black cloud over the group,” Larkin says. “However, the ugly volumes create some buying opportunities across the rail group, in our view.”
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Larkin says Union Pacific was having a very challenging second quarter. But, he believes it represents the company’s low point of the cyclical downturn.
“The company has shed a lot of cost here in the first half to rightsize its asset deployment, and I think the year-over-year comps will look much easier as we move toward the end of the year and into 2016,” he says. “At that time, we think the stock will regain some of its lost momentum.”
Stifel, Nicolaus & Co. Analyst John Larkin says investors have been negative about railroads lately because of decreased grain and coal volumes. He says that is creating a buying opportunity for some stocks like Genesee & Wyoming Inc (GWR).
“The railroads are cheaper relative to their own valuation histories and relative to the broader market indices than they have been in quite some time,” Larkin says.
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Larkin says Genesee & Wyoming has been “slaughtered of late,” partly because of the iron ore mines that closed in Australia due to decreased demand from China. But, Larkin still has a “buy” rating on the stock.
“We continue to believe that Genesee & Wyoming is a very high-quality company that hasn’t been this inexpensive in a number of years,” he says.
